Is Building Up Your Child’s Credit A Good Idea?
Parents want to do everything they can to protect their children from harm. From teaching them to look both ways at crosswalks to the “don’t take candy from strangers” speech, protection is at the heart of these lessons.
But when it comes to talk about personal finances, the typical family money speech to kids resembles something along the lines of an 18th Century discussion about sex: A few words mumbled under the breath that sound like “Uhh, don’t do it.”
Well, at least that was the way it was in my household. So when I entered the world of finance as a college freshman, I was woefully unprepared to master money and debt. This struggle continued well into adulthood before I began to get serious about frugality, investing, and debt reduction.
Many parents are in this very same boat and now feel impelled to help their kids avoid the mistakes that they made. A good way to achieve this goal is to help the child learn to save.
However, some parents take these lessons a bit farther by helping their teens obtain credit cards or other loans. Let’s examine one argument for and against this approach.
Pro: The Child Starts Building A Credit History Early
A child who has earned a stable and established credit history by the time she turns 18 will be significantly ahead of a majority of the population at that age. This financial head start can be a major benefit if loans are needed to help cover the cost of education.
Also, when her income level rises after college, it will be much easier to acquire a house, car, or other high ticket items at a reasonable interest rate, if so desired.
Con: Responsibility and Maturity Levels Vary
For truly responsible kids who really understand the value and danger of credit, the potential for harm can be significantly mitigated, and the future rewards amplified.
But if the child is not able to really understand the threat, no amount of speeches about the dangers of credit and the virtues of saving are going to sink in until the actual pain of monetary mismanagement comes home to roost.
In our modern and technologically advanced society the power of constant marketing and peer pressure often overwhelms even the brightest young minds. Advertisers offer us everything we want, right now, and will give it to us even if we can’t afford really it. All that’s needed is a simple signature.
Rationalizations happen and BOOM, soon the poor kid is carrying a balance at an obscene interest rate. Then the real struggle begins.
What We Should Be Teaching Kids
Some kids just seem to have an “I’m From Missouri, You Need To Show Me” mentality where they need to have the punishment doled out before they can really learn the lesson. Other kids are the type that are able to learn profound life lessons merely from hearing stories about various pitfalls. In either case, parents should instill the following principles in their kids at an early age: Minimalism and Frugality.
This is the true foundation for being able to properly evade the constant traps being offered to the unwary. If children can learn to make correct economic decisions in small things, this same process should scale out allow them to make the correct decisions in big things.
That way, if the child chooses to go the route of building their credit profile it will be with this sturdy mental foundation as a basis for action.